‘Investors should look at their risk taking ability, not the fund size’

Sanjay Dongre, Senior Fund Manager, UTI Mutual Fund talks about UTI Leadership Equity Fund and UTI Infrastructure Fund which he manages. He says that more than the AUM of the fund, investors should look at their risk taking ability before investing in a fund.

What was the reason behind merging UTI Masterplus Unit Scheme into UTI Leadership Equity Fund? How many investors opted to continue in the new fund?

We were looking to consolidate and reduce the number of funds. Both the funds were diversified large cap funds and were managed in identical fashion by investing in high growth stocks. The investment philosophy of both the funds were similar. Commonality of the stocks in both the fund was higher. Also, the nomenclature ‘ Master Plus’ did not give any clarity on the investment objective of the fund to the investors while ‘Leadership’ was self explanatory as far as conveying investment objective to the investor. Hence it was decided to merge both the funds. It also helped UTI MF to reduce the multiplicity of the funds.

When the scheme was merged, majority of investors opted to continue in the new fund.

How do you identify 'leaders' in your UTI Leadership Equity Fund (UTILF)? What is your definition of 'leaders'? Do you completely avoid companies which can be the next leaders in a particular sector?

The fund invests in stocks that are "leaders" in their respective industries/sectors/sub-sectors.  We look at indicators like sales, profits, market share, market capitalization, etc. and then look at the stocks which are the top quartile in a sector based on these indicators.

As per the investment objective of the fund, it can invest at least 65% of its assets in the leaders in various sectors and maximum 35% is in the emerging leaders. I use a combination of top down and bottom up approach to identify stocks in this scheme.

Which kind of investors is the fund suited for?

Investors who wish to participate in equity markets but are not willing to take higher risks associated with thematic/sector funds can consider this fund. On a risk spectrum, UTI Leadership Fund would be ranked higher than that of index fund and lower than the thematic / sector fund.

How do you avoid overlap of stocks in UTI Leadership Fund and other large cap funds of UTI since UTILF is also a large cap fund?

We don’t consciously replicate stocks in all large cap funds. Some amount of overlap cannot be avoided. Each fund manager constructs a portfolio according the investment objective of the fund. There could be some instances where views of one fund manager on stock/sector could differ from that of another fund manager within the fund house. Hence, weightages allocated to sectors/stocks could differ among the various large cap funds of UTI MF.

UTI Infrastructure Fund has lagged behind its smaller sized peers…

UTI Infrastructure fund is one of the largest funds in the infrastructure category. So, ideally it should be compared with the likes of HDFC Infrastructure Fund, ICICI Prudential Infrastructure Fun, DSP BlackRock T.I.G.E.R. Fund, SBI Infrastructure fund, Tata Infrastructure Fund, Sundaram Infrastructure Advantage Fund. The following table shows the performance of the large size infra funds during the period (Jan 1, 2014 to Oct 21, 2014)

The UTI Infra fund has done well compared to some the large infra funds in the industry.  The investment objective of the fund is of paramount importance to us.  UTI Infrastructure Fund remained true to its label even when infra sector was not in a good shape. The same may not be true for some of the peer infrastructure funds in the industry. Some of the peer infrastructure funds have invested in non-infra related sectors such as auto, IT, pharmaceutical, etc. at various point of time.

Should investors look at the fund’s size while investing?

More than the AUM of the fund, investors should look at their risk taking ability. Large size funds tend to invest large part of the corpus in the large cap stocks considering the liquidity and impact cost associated with the mid/small cap stocks. Small size funds have an option of investing in the mid/small cap stocks where risk/reward profile is higher than that of large cap stocks. Hence investors having high risk appetite may look at small size funds.

What changes have you made in the portfolio of UTI Infrastructure Fund to take advantage of the government's efforts to improve the infrastructure in India? Which sectors within infra space are you bullish on?

In the last one year, the fund has increased weightages to sectors such as construction and capital goods sector while reducing the exposure to energy sector. We increased our exposure to assets owners as the recovery in the GDP may result in improving the profitability of the existing operational infra assets. Also, the portfolio composition was rebalanced by increasing weightage to mid/small caps stocks and reducing the weightage to large cap stocks.

Within infra space, we have a positive outlook on the construction sector. In the road sector, the government is considering to increase spending through Engineering, Procurement, and Construction (EPC) mode compared to Build-Operate-Transfer (BOT) mode. The government has plans for increasing investments in railways by way of spending on Dedicated Freight Corridor (DFCs) and metros in larger cities. The government is also putting emphasis on increasing urbanization with higher spending on urban infrastructure and smart cities. Hence opportunities available for Engineering, Procurement and Construction (EPC) players are likely to be substantial in next 5 years. In the recent times, some of the EPC players have repaired their balance sheet by raising equity, selling BOT assets and reducing debt. EPC players having stress-free balance sheets are most likely to be winners in capitalizing the opportunities.

Another way to play infrastructure theme would be through exposure to cement sector. In cement sector, demand- supply gap is expected to narrow considerably with lower supply additions while the demand is expected to be high single digit on the back of recovery of GDP and capex cycle. Now the time period between conceptualization of cement plant and its commissioning is estimated to be about 7 years compared to 4-5 years earlier.  It bodes well for the pricing power of the cement companies.

The investment objective of this fund allows us to invest in financial services sectors, including banks. Our exposure to financial services is limited to banks who have financed infrastructure projects in the country. UTI Infrastructure Fund has exposure to corporate oriented banks and not to retail oriented banks. Corporate oriented banks are expected to be major beneficiaries of recovery in the GDP growth and falling inflation in the economy.

Are you seeing any tangible changes in the infrastructure sector on the ground?

The infrastructure stocks have shot up merely on the hopes of positive government actions. In the near term, the government is attempting to kick start the stalled projects by removing constraints related to resource mining, environmental and forest clearances. Cabinet Committee on Investments (CCI) is trying to expedite the processes and improve the ease of doing business in India. With revival in GDP, Indian corporate is expected to undertake capacity expansions (Brownfield and Greenfield) in the capacity constrained sectors. It may lead to revival of investment cycle in the economy.

How do you mitigate risk in the portfolio, since UTI Infrastructure Fund is a sector fund which entails higher risks for investors?

As a part of risk mitigation measure, our internal guidelines restrict a single sector exposure to 40% for thematic funds. However, UTI infrastructure fund is limiting a single sector exposure to 25% at the time of investment. It ensures diversification within infra theme. In order to avoid concentration risk, UTI Infrastructure Fund has been maintaining exposure to at least 40 stocks and around 50% exposure to top 10 stocks. UTI infrastructure also maintained a balanced exposure between large cap stocks and mid/small cap stocks and not skewed towards either of them.

Your favorite book and why you would recommend it to others?

‘Don’t sweat the small stuff’ by Richard Carlson. This book tells you how to keep from letting little things in life affect your life. It reveals ways to calm down in the midst of stress filled life.